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A decrease in taxes will shift aggregate demand to the _____, cause consumption to _____, and cause output to _____. Due to the crowding-out effect, investment will _____.

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Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment?


A) a decrease in the money supply
B) an increase in tax rates
C) an increase in government purchases
D) an increase in interest rates.

E) B) and C)
F) A) and D)

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As real GDP falls,


A) money demand rises, so the interest rate rises.
B) money demand rises, so the interest rate falls
C) money demand falls, so the interest rate rises.
D) money demand falls, so the interest rate falls.

E) None of the above
F) A) and B)

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According to liquidity preference theory, a decrease in money demand for some reason other than a change in the price level causes


A) the interest rate to fall, so aggregate demand shifts right.
B) the interest rate to fall, so aggregate demand shifts left.
C) the interest rate to rise, so aggregate demand shifts right.
D) the interest rate to rise, so aggregate demand shifts left.

E) A) and D)
F) All of the above

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Economists who are skeptical about the relevance of "liquidity traps" argue that


A) a central bank continues to have tools to stimulate the economy, even after its interest rate target hits its lower bound of zero.
B) a central bank continues to have the option of committing itself to future monetary contraction, even after its interest rate target hits its lower bound of zero.
C) a central bank can greatly reduce the likelihood of a liquidity trap by setting the target rate of inflation at zero.
D) while the concept of a liquidity trap is theoretically possible, nothing resembling a liquidity trap ever has been observed in the real world.

E) A) and B)
F) A) and C)

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Figure 34-6. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs. Figure 34-6. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs. -Refer to Figure 34-6. Suppose the multiplier is 5 and the government increases its purchases by $15 billion. Also, suppose the AD curve would shift from AD1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Also, suppose the horizontal distance between the curves AD1 and AD3 is $55 billion. The extent of crowding out, for any particular level of the price level, is A) $75 billion. B) $40 billion. C) $30 billion. D) $20 billion. -Refer to Figure 34-6. Suppose the multiplier is 5 and the government increases its purchases by $15 billion. Also, suppose the AD curve would shift from AD1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Also, suppose the horizontal distance between the curves AD1 and AD3 is $55 billion. The extent of crowding out, for any particular level of the price level, is


A) $75 billion.
B) $40 billion.
C) $30 billion.
D) $20 billion.

E) A) and D)
F) All of the above

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If expected inflation is constant, then when the nominal interest rate falls, the real interest rate


A) falls by more than the change in the nominal interest rate.
B) falls by the change in the nominal interest rate.
C) rises by the change in the nominal interest rate.
D) rises by more than the change in the nominal interest rate.

E) A) and C)
F) A) and B)

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Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve.

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When the money supply increases, the int...

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If net exports fall $40 billion, the MPC is 9/11, and there is a multiplier effect but no crowding out and no investment accelerator, then


A) aggregate demand falls by 2 x $40 billion.
B) aggregate demand falls by 11/2 x $40 billion.
C) aggregate demand falls by 11/9 x $40 billion.
D) aggregate demand falls by 9/11 x $40 billion.

E) B) and D)
F) All of the above

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Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?


A) the crowding-out effect
B) the multiplier effect
C) the exchange-rate effect
D) the interest-rate effect

E) A) and B)
F) B) and C)

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Figure 34-6. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs. Figure 34-6. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs. -Refer to Figure 34-6. Suppose the multiplier is 3 and the government increases its purchases by $25 billion. Also, suppose the AD curve would shift from AD1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Finally, assume the horizontal distance between the curves AD1 and AD3 is $40 billion. The extent of crowding out, for any particular level of the price level, is A) $15 billion. B) $40 billion. C) $35 billion. D) $95 billion. -Refer to Figure 34-6. Suppose the multiplier is 3 and the government increases its purchases by $25 billion. Also, suppose the AD curve would shift from AD1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Finally, assume the horizontal distance between the curves AD1 and AD3 is $40 billion. The extent of crowding out, for any particular level of the price level, is


A) $15 billion.
B) $40 billion.
C) $35 billion.
D) $95 billion.

E) None of the above
F) B) and C)

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Figure 34-2. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs. Figure 34-2. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs. -Refer to Figure 34-2. Assume the money market is always in equilibrium, and suppose r1 = 0.08; r2 = 0.12; Y1 = 13,000; Y2 = 10,000; P1 = 1.0; and P2 = 1.2. Which of the following statements is correct? When P = P2, A) investment is lower than it is when P = P1. B) nominal output is higher than it is when P = P1. C) the expected rate of inflation is higher than it is when P = P1. D) the velocity of money is higher than it is when P = P1. -Refer to Figure 34-2. Assume the money market is always in equilibrium, and suppose r1 = 0.08; r2 = 0.12; Y1 = 13,000; Y2 = 10,000; P1 = 1.0; and P2 = 1.2. Which of the following statements is correct? When P = P2,


A) investment is lower than it is when P = P1.
B) nominal output is higher than it is when P = P1.
C) the expected rate of inflation is higher than it is when P = P1.
D) the velocity of money is higher than it is when P = P1.

E) All of the above
F) C) and D)

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The government increases both its expenditures and taxes by $400 billion. There is no crowding out and no accelerator effect. Aggregate demand shifts by $400 billion. Which of the following is consistent with how far aggregate demand shifts?


A) MPC = 1/2, and the effects of the increase in taxes is 1/2 as strong as the change in government expenditures.
B) MPC = 2/3, and the effects of the increase in taxes is 2/3 as strong as the change in government expenditures
C) MPC = 3/4, and the effects of the increase in taxes is 3/4 as strong as the change in government expenditures
D) All of the above are correct.

E) None of the above
F) A) and B)

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Which of the following events would shift money demand to the right?


A) an increase in the interest rate or an increase in the price level
B) an increase in the interest rate, but not an increase in the price level
C) an increase in the price level, but not an increase in the interest rate
D) neither an increase in the interest rate nor an increase in the price level

E) B) and C)
F) None of the above

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People hold money primarily because it


A) increases in value when there is inflation.
B) serves as a store of value.
C) serves as a medium of exchange.
D) functions as a unit of account.

E) B) and C)
F) A) and D)

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Assume there is a multiplier effect, some crowding out, and no accelerator effect. An increase in government expenditures changes aggregate demand more,


A) the smaller the MPC and the stronger the influence of income on money demand.
B) the smaller the MPC and the weaker the influence of income on money demand.
C) the larger the MPC and the stronger the influence of income on money demand.
D) the larger the MPC and the weaker the influence of income on money demand.

E) A) and B)
F) C) and D)

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Which of the following shifts aggregate demand to the right?


A) The price level rises.
B) The price level falls.
C) The money supply falls.
D) None of the above is correct.

E) All of the above
F) B) and D)

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According to the theory of liquidity preference, if the interest rate rises


A) people want to hold more money. This response is shown by moving to the right along the money demand curve.
B) people want to hold more money. This response is shown by shifting the money demand curve right.
C) people want to hold less money. This response is shown by moving to the left along the money demand curve.
D) people want to hold less money. This response is shown by shifting the money demand curve left.

E) A) and C)
F) B) and C)

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Figure 34-8 Figure 34-8 -Refer to Figure 34-8. An increase in taxes will A) shift aggregate demand from AD1 to AD2. B) shift aggregate demand from AD1 to AD3. C) cause movement from point A to point B along AD1. D) have no effect on aggregate demand. -Refer to Figure 34-8. An increase in taxes will


A) shift aggregate demand from AD1 to AD2.
B) shift aggregate demand from AD1 to AD3.
C) cause movement from point A to point B along AD1.
D) have no effect on aggregate demand.

E) B) and C)
F) All of the above

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There are three factors that help explain the slope of the aggregate demand curve. Which two are less important? Why are they less important?

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The wealth effect and the exchange-rate ...

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